Normally, the word 'sacrifice' sounds like you're losing something. However, with salary sacrificing, there are many benefits to gain. In this article, we explore the potential upsides while outlining important considerations to make.
Key insights:
- Salary sacrifice can reduce your tax and give you access to non-cash benefits like motor vehicle leasing.
- It can also be used to boost your super at a concessional tax rate, leading to higher tax benefits and retirement savings.
- Salary sacrificing affects your gross or taxable income, so it can impact government entitlements and other benefits.
- Consider seeking financial or tax advice before agreeing to a salary sacrifice arrangement.
What is salary sacrificing?
Salary sacrificing, also called salary packaging, is voluntarily giving up a portion of your salary in exchange for non-cash benefits of the same value, which may include cars, computers, shares and superannuation.
It is an arrangement you enter with your employer, and it applies to your pre-tax salary.
Why is salary sacrificing beneficial?
The main benefit of a salary sacrificing arrangement is that it reduces your taxable income, meaning you may pay less income tax.
For instance, if you receive a $100,000 salary, you can arrange to receive $85,000 as income and a $15,000 car as a benefit, reducing your taxable income to $85,000.
This reduction in taxable income means you pay less income tax; in this example, more than $4,000 less.
Because of the potential for salary sacrificing to significantly reduce taxable income, it is deemed most advantageous for mid– to high-income earners who will benefit from greater tax savings.
How else does salary sacrifice affect tax?
It is important to note that certain non-cash benefits provided through salary sacrificing may be subject to additional Fringe Benefits Tax. This is payable by your employer, who will pass this cost on to you.
As salary sacrificing lowers your taxable income, you may also experience:
- A lower Medicare Levy
- Reduced HECS-HELP repayments
- Tax advantages if your salary sacrifice is directed towards additional superannuation contributions.
How does salary sacrifice affect superannuation?
If you choose to direct your salary sacrifice towards your superannuation, they will count as concessional contributions.
These contributions are taxed at a concessional rate of 15%, which is generally lower than your marginal tax rate. This provides a potential tax advantage.
However, they are also subject to a yearly concessional contributions cap set by the ATO. Exceeding this cap may result in additional tax.
It’s important to keep an eye on where you’re at with your concessional contributions cap to ensure that your salary sacrifice arrangement aligns with your financial goals and regulatory limits. As a client of Green Associates, you can feel confident that we’re on top of this for you; book your first consultation today.
How much can I salary sacrifice to super?
Since 1 July 2021, the annual super concessional contribution cap has been set at $27,500 per year. This means you can salary sacrifice a total yearly contribution of that amount to your superannuation and have it taxed at the concessional rate of only 15%.
There are instances where your cap could be higher; from 2019-20, your unused cap amounts accrue and may be carried forward for up to 5 years before they expire.
To find out exactly how much is available to you, log in to ATO online services, select Super, and then select Concessional contributions.
It can be helpful to engage an accountant or consult with your Green Associates financial adviser to help you navigate this process.
Does salary sacrificing impact other entitlements or incur fees?
As salary sacrificing may impact your reported gross income, it can affect your eligibility for certain entitlements, such as:
- Government benefits
- Tax offsets
- Child support payments
- Insurance premium rebates
- Leave entitlements with certain employers.
The impacts are highly dependent on your individual circumstances — as is the effectiveness of a salary sacrifice arrangement in helping you achieve your financial goals. As always, we highly recommend seeking financial advice before making any decisions. Contact Green Associates today to get started.
